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Will web-based office applications from Google ever become as popular as Microsoft's applications in the corporate world?

Yes: Eventually, web-based office applications from Google will catch up to Microsoft and be common in the business world.

No: Microsoft Office is too well entrenched and Google will never catch up.

Software M&A: Deals Heat Up

By Ken Bender, Managing Director and David Legacki, Associate, Software Equity Group, L.L.C

M&A Deal activity within the software sector continues its torrid pace. Deals highlighted this month include Battery Ventures’ private equity buyout of Quovadx in the SOA software and services category, Business Objects’ acquisition of Inxight, a high-flying unstructured data access and analysis developer, DealerTrak’s acquisition of Arkona within the automotive vertical, Invensys’ acquisition of Cimnet within the manufacturing vertical, Oracle’s continued acquisition spree, this time it’s Agile Software in the PLM category and Pearson’s acquisition of eCollege within the education software vertical.

Sign up for Software Equity Group’s complementary (http://www.softwareequity.com) 1Q07 M&A Report, which provides a comprehensive analysis of deals, valuations and trends in 1Q07.

Battery Ventures acquires Quovadx (NASDAQ: QVDX)
Category: SOA Software
Purchase Price: $136,700,000
Seller Revenue: $81,200,000
EBITDA: $5,590,000
Revenue Multiple: 1.7x
EBITDA Multiple: 24.5x
Payment Terms: Cash

SEG’s Perspective:
Battery Ventures, a large venture capital/private equity firm, acquires Quovadx, developer of SOA solutions and software for healthcare organizations and financial services firms. Battery’s deep pockets will likely help Quovadx grow market share and compete against larger rivals. Healthcare IT spending is projected to grow at a 7.7% CAGR and SOA software and services are projected to grow at a 41.7% CAGR. Immediately prior to deal announcement, Quovadx sold its CareScience division, an ASP-based provider with over 200 hospital customers, to Premier, a Group Purchasing Organization comprising 1,700 hospitals and 45,000 other healthcare sites3. The $136.7 million purchase price paid by Battery Ventures includes the proceeds of the CareScience sale and represents a 24% premium compared to Quovadx’s closing stock price prior to announcement.

1: CAGR 2004-2009 Estimate. Source: CIBC Report, February 2007
2: CAGR 2006-2010 Estimate. Source: Forrester
3: Purchase Price: $34.9 million, 2.3x TTM Revenue, 19.4x TTM EBITDA

Business Objects (NASDAQ: BOBJ) acquires Inxight
Category: Data Analytics Software
Purchase Price: $100,000,000 (estimate)
Seller Revenue: $25,000,000 (estimate)
Revenue Multiple: 4.0x
Payment Terms: Cash

SEG’s Perspective:
Business Objects, one of the world’s largest business intelligence (BI) software providers, acquires Inxight, a Palo Alto Research Center spinout and developer of unstructured data access and analysis software. Inxight positions Business Objects in the fast growing unstructured data management market, aiding its expansion beyond BI and into enterprise performance management. According to IDC, Inxight is estimated to have 3% of the information access tools market, which is expected to grow at a 22% CAGR over the next five years and is dominated by Autonomy, Fast Search & Transfer, Convera and Endeca. The acquisition follows closely on the heels of Reuters’ recent acquisition of text analytics solution provider ClearForest, and is Business Objects’ second acquisition (Cartesis) of 2007.

DealerTrack (NASDAQ: TRAK) acquires Arkona (OTC: ARKN)
Category: Automotive Dealer Management Software
Purchase Price: $58,162,280EV
Seller Revenue (TTM): $12,760,000
EBITDA (TTM): $1,430,000
Revenue Multiple (TTM): 4.6xEV
EBITDA Multiple (TTM): 40.7xEV
Payment Terms: Cash

SEG’s Perspective:
DealerTrack, developer of SaaS solutions to automotive dealers, financing sources and other automotive service and information providers, makes another acquisition in its target vertical by purchasing Arkona, a developer of on-demand software for automotive dealerships. Arkona had grown revenue 105% from FY04 and had gained real traction among independent automotive dealerships. DealerTrak has performed well, too, despite problems plaguing the domestic automobile industry. The company’s stock price has risen over 90% from its IPO opening in 2005, in large part due to strategic acquisitions that have grown revenue 147.6% in CY06 compared to CY04. Arkona is DealerTrack’s eighth and largest automotive retail acquisition since 2005 and its second in 2007 (Curomax – $37.5 million1, 3.7x2). The purchase price represents a 4% premium over Arkona’s five-day average closing stock price prior to announcement.

1: Equity Purchase Price
2: Purchase Price/TTM revenue

Invensys (LSE: ISYS) acquires Cimnet (OTC: CIMK)
Category: Manufacturing Software
Purchase Price: $23,670,000EV
Seller Revenue (TTM): $5,610,000
EBITDA (TTM): $635,900
Revenue Multiple: 4.2x EV
EBITDA Multiple: 37.2xEV
Payment Terms: Cash

SEG’s Perspective:
Invensys, a multibillion dollar industrial automation, controls and process conglomerate acquires Cimnet, developer of manufacturing software for the aerospace, automotive, pharmaceutical, medical devices, food and beverage and consumer packaged goods industries. The acquisition of Cimnet’s manufacturing intelligence and MES software is a natural plug-in to Invensys’ solutions that encompass the entire manufacturing and control enterprise. Despite competing against much larger ERP and manufacturing software and services vendors, Cimnet was able to grow revenue at a CAGR of 23.2% from CY2003 to CY2006 and posted net income of $1.4 million in CY2006. The purchase price represents an 8.5% premium over Cimnet’s 30-day average closing stock prices prior to announcement.

Oracle (NASDAQ: ORCL) acquires Agile (NASDAQ: AGIL)
Category: Product Lifecycle Management (PLM)
Purchase Price: $330,560,000EV
Seller Revenue: $130,120,000
EBITDA: ($5,850,000)
Revenue Multiple: 2.5xEV
Payment Terms: Cash

SEG’s Perspective:
Enterprise software giant Oracle acquires Agile Software, a developer of product lifecycle management solutions. With Agile, Oracle picks up a relatively small, but respected company in one of the fastest growing enterprise application segments. Agile runs on Oracle and 98% of Agile’s customers are Oracle technology customers. PLM spend is expected to reach $7.3 billion in 2009 and grow at an 11% CAGR1. Despite boasting renewal rates of 95% on maintenance and support contracts and 46% recurring revenue, Agile has reported a net loss for each of its last three fiscal years, but its exit valuation was buoyed by a significant cash hoard, which constituted 33% of the equity purchase price. Agile posted a 0.4% decrease in revenue over its last twelve months, but analysts projected 10.0% growth in its next fiscal year ending April 2008. Oracle paid a 14% premium over Agile’s closing stock price prior to announcement.

1: Source: AMR Research 2006

Pearson (NYSE: PSO) acquires eCollege (NASDAQ: ECLG)
Category: Education Software
Purchase Price: $529,000,000EV
Seller Revenue (TTM): $54,877,000
EBITDA (TTM): $23,030,000
Revenue Multiple: 9.6xEV
EBITDA Multiple: 23.0xEV
Payment Terms: Cash

SEG’s Perspective:
Pearson Education, one of the world’s largest educational textbook publishers for the K-12, higher education and professional markets, acquires eCollege, a provider of on-demand information services to the post-secondary and K-12 education market. While eCollege’s $55 million in revenue pales in comparison to Pearson Education’s digital education sales of $1 billion, eCollege is a leader in the high growth online distance learning market, and has grown revenue at a 2003-2006 CAGR of 22%. Analysts were projecting eCollege would grow revenue 21.6% in CY07 compared to CY06, and 19.9% in CY08 compared to CY07. The purchase price represents a modest 7% premium over the company’s closing stock price prior to announcement.

Software Equity Group, L.L.C. (SEG), a mergers and acquisitions advisory firm serving the software, life science and technology sectors, prepared this report. SEG is solely responsible for its content. This material is based on data obtained from sources we deem to be reliable; it is not guaranteed for its accuracy and does not purport to be complete. This information is not to be used as the primary basis of investment decisions. For more, please visit www.softwareequity.com, or phone (858) 509-2800.

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